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22
A Global Melsa Ararat and George Dallas
Corporate
Governance
Forum Publication W hat should investors do when scholarly research on corporate
governance in emerging markets does not provide conclusive
evidence on which aspects of governance matter most across all the
emerging markets and how they affect firm performance? A researcher and
a practitioner team up to offer guidelines and recommendations that focus
on board independence and business group affiliation.
Foreword
Every day, institutional investors in emerging markets must make practical
decisions on the basis of incomplete and at times conflicting information.
So, it is critically important that they make the best use of this imperfect
knowledge. Moreover, investors too often enter emerging markets with
misguided perceptions of the underlying realities. And worse, they may
cling to a conceptual framework of governance that does not allow them
even to consider the searching questions they should be asking.
In discussing the first of the two dimensions, the quality of board independence, Ararat and
Dallas address the fundamental difference between the governance challenge for boards
that operate in those developed markets where shareholders are dispersed, and boards
that operate in emerging markets, which are characteristically dominated by controlling
shareholders, often family members. In the former, the key governance risk is the agency
problem of self-interested management. In emerging markets, the central issue is subversion
of minority interests by the controlling shareholder bloc, whether it is a family, a group of
business partners, or a state-owned enterprise.
Can good governance practices overcome, or at least offset, the power of the dominant
ownership bloc? The authors are cautious, noting that a wealth of scholarly literature
suggests that the influence of independent directors is hard to demonstrate. More research
is needed to better understand the links between outside shareholders, such as institutional
investors, and their board representation.
But, to its credit, this paper does not stop there. Recognizing investors’ enduring interest
in identifying well-functioning boards, the authors provide their own set of health checks
and warning lights, designed to squeeze as much substance as possible from the limited
evidence that is typically available. Their recommendations on what investors should
press for are clear and well-reasoned. However, the inescapable problem is the uneven
balance of power: controlling shareholders will be receptive to such proposals only if
these proposals are demonstrably in their own interests. Ararat and Dallas set out some
promising mechanisms; it is up to the global investor community—equity investors
and bondholders—to devise inducements that will encourage controlling shareholders
voluntarily to make some concessions to achieve best practice.
The second dimension explored in this paper—how to mitigate the risks of business
group affiliations—presents a similar story. These risks have provided a field day for
cynical scholars, who have delighted in categorizing the multiple routes through which
related-party transactions can siphon or “tunnel” resources away from minority investors.
The presence of large-scale business groups maximizes the potential for such practices.
Offsetting this risk, as Ararat and Dallas point out, internal markets can at times be highly
beneficial when external product, labor, and capital markets are functioning poorly.
2 ISSUE 22
Private Sector Opinion Electronic copy available at: http://ssrn.com/abstract=1914267
Too often, however, controlling shareholders have the opportunity to engage in abusive
behavior, a circumstance that can be exacerbated in jurisdictions where transparency is
poor and where a weak rule of law fails to give minority investors proper judicial recourse.
Once again, the authors offer a practical helping hand. If on other grounds a potential
minority shareholder is inclined to invest, here are the health checks that will offer some
comfort, even if no certainty.
The overriding theme of this important and highly practical paper is the need for institutional
investors to work assiduously with boards and controlling owners to demonstrate the value
of ongoing engagement. The authors argue convincingly that investors can and should play
a role in shaping governance practices in emerging markets through informed voting and,
perhaps more importantly, ongoing engagement with companies and regulators.
Yes, naïve and opportunistic investors can be exploited by manipulative bloc holders.
Yet, ultimately such exploitation is a short-term strategy for incumbent owners and their
management teams. The tide of events is moving inexorably, if gradually but inexorably,
toward the greater integration of capital markets. Far-sighted controlling shareholders will
increasingly see the merits of responding more openly and willingly to investors’ reasonable
demands. Meanwhile, this paper provides practical guidance to investors in emerging
markets.
Paul Coombes
Chairman, Centre for Corporate Governance, London Business School
ISSUE 22 3
Private Sector Opinion
Corporate Governance in Emerging Markets:
Why It Matters to Investors—and What They
Can Do About It
Melsa Ararat and George Dallas1
Emerging markets play an increasingly important role in the global economy, given their
high economic growth prospects and their improving physical and legal infrastructures.
Combined, these countries account for nearly 40 percent of global gross domestic product,
according to the International Monetary Fund.
For some investors, emerging markets offer an attractive opportunity, but they also involve
multifaceted risks at the country and company levels. These risks require investors to have
a much better understanding of the firm-level governance factors in different markets.
On a different track, researchers have investigated how different firm structures determine
corporate governance and the effect of those firm-level governance choices on firm
performance. These studies, largely based on data from developed countries with dispersed
ownership, assess several governance indicators that could be associated with higher
valuation and better performance.3
1
Melsa Ararat is Director of Corporate Governance Forum of Turkey and a member of the Faculty of Management at Sabanci University,
Turkey. George Dallas is Director of Corporate Governance at F&C Investments in London and a member of its governance and sustainable
investment team.
2
The analysis of existing research on corporate governance in emerging markets draws in part from M. Ararat’s scholarly articles (available
at http://ssrn.com/author=439363 and an F&C Investments report, Corporate Governance in Emerging Markets: An Investor’s Roadmap,
December 2008 (available at www.fandc.com/governance).
3
See La Porta et al. (1998) for anti-directors index, which uses governance indicators related to board contestability; Djankov et al. (2008) for
anti-self dealing index; and Gompers, Ishii, and Metrick (2003) and Bebchuk, Cohen, and Ferrell (2009) for governance indexes.
4 ISSUE 22
Private Sector Opinion
depending on the regulations and the level of enforcement. Further, in some circumstances,
“friendly” outside directors may also be more trusted and more knowledgeable than
“independent” directors.
For the past three years, approximately 1,000–1,200 papers have been published each year
on the Social Sciences Research Network with the term “corporate governance” appearing
as a key word in the abstract. However, fewer than 1 percent of these papers focus on
emerging markets. These numbers indicate a relatively limited scholarly focus on emerging
markets, possibly due to data limitations. Much of the work thus far has focused on board
structures, for which data are relatively more available.
• The quality of public governance affects the level of law enforcement and, in turn,
the extent of bribery and other forms of corruption. These factors influence the
quality of corporate governance and corporate transparency in a country. Compliance
with the law and the avoidance of bribes can be a source of competitive
4
See Fan, John Wei, and Xu (2011) for a review.
ISSUE 22 5
Private Sector Opinion
disadvantage in countries where compliance adds to the operating costs and runs
counter to business norms that tolerate bribery.5 Further, research suggests that it is
a misconception that all companies in countries with weak investor protection have
weak corporate governance systems.
• In countries where state ownership is common, the incentives and the quality of
government officials and regulators are key determinants of corporate behavior.
For example, state ownership is associated with better performance in some countries,
such as in China; in others, such as in Turkey, the correlation is negative. This
difference, which can be attributed to many factors, is usually contingent on the
incentive structures for public officials.
• Product market competition, although frequently considered a positive influence
on corporate governance practices, is generally far from perfect in emerging markets,
particularly in protected sectors.
• Financial market development is often hampered by weak legal foundations and
enforcement. As a result, the controlling shareholders invest their free cash in new
businesses that they control. Such diversified investments under common control
lead to the formation of business groups. In some emerging markets, such as India,
business group structures that function as internal financial markets are correlated
with better performance. In others, such as Colombia, group affiliation is negatively
associated with performance. Based on our analysis, this variation likely depends
on the primary motivation for the emergence of business groups in the first place,
which varies from tax optimization to lowering transaction costs to diversifying risks.
There is also a question of how—and whether—group structures are regulated. In
Taiwan, for example, connected enterprises are mandated to disclose crossholdings
and pyramidal links. In India, under the new Company Law, a company can hold
as many subsidiaries as it likes, but a subsidiary cannot act as the holding company
of another company. These provisions aim to prevent private control over public
companies through pyramidal structures.
• Ownership structures determine the nature of the relationship between the
board and performance. In many emerging economies, controlling families occupy
managerial positions in listed firms, and succession planning is often focused on
family members and not on professional managers. Family presence, especially
the founders’ presence on the board, is associated with better performance in
some countries where relationships matter more and the business elite are tightly
connected, such as in Thailand. In other markets, such as the Republic of Korea, the
presence of outsiders has a positive effect on performance.
5
See United States Department of Justice (2006) “Foreign Corrupt Practices Act Antibribery Provisions” for a summary of discussions on
how American companies were operating at a disadvantage due to the Foreign Corrupt Practice Act, which led the U.S. government to
negotiate, with OECD, the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
6 ISSUE 22
Private Sector Opinion
Traditional econometric research provides relatively little
guidance at this point, because the interplay between Traditional econometric research
institutions and their effect on performance outcomes is very provides relatively little practical guidance
difficult to model. at this point, yet corporate governance
remains a key risk factor for investors in
emerging markets.
Yet, corporate governance remains a key risk factor for
investors in emerging markets and an important determinant
of portfolio investment decisions. This is the case at both
the country level, where rule of law, regulatory quality, and corruption are key drivers for
country-level risks, and at the firm-specific level, where controlling shareholders (state,
families, or other financial or industrial groups) play a decisive role and are a source
of strength or weakness. These risks are relevant to equity investors and fixed-income
investors.
Even though investors tend to assign some form of discount in their valuation of firms in
countries with relatively poor corporate governance, one option for active investors is to
work with companies to improve their governance. The longer-term endgame should be to
realize value by reducing, or possibly eliminating, this governance discount.
Notwithstanding the constraints they face, investors can and should play a role in shaping
governance practices in emerging markets. This role should involve informed voting and,
perhaps more importantly, ongoing engagement with companies and regulators.
ISSUE 22 7
Private Sector Opinion
understand the peculiarities of different markets and firms. It also helps if investors
understand the underlying reasons for a company’s deviations from generally
accepted norms of good governance.
Both voting and engagement present the same challenge: to understand which choices
matter in individual companies, especially given the external governance factors, and then
to focus on those choices. Emerging market firms are generally affiliated with multiple
networks connected by formal or informal ties. These structures present challenges for
quantification of governance risks.
1) Board Independence
In emerging markets where external governance mechanisms are weaker, boards’ ability to
effectively monitor managers on behalf of shareholders has been crucially important for
corporate governance. However, this board function may be undermined if shareholders
and managers (ownership and control) are not fully separated. This is a particular concern
for minority shareholders in emerging market companies. Therefore, corporate governance
codes commonly recommend a high level of board independence—especially independence
from management.6 A study of outside directors in Korea, for example, shows that their
impact depends on the board’s overall composition and the market in which the firm
operates. Independent directors perform their role more
effectively in diverse boards, such as when boards include
Corporate governance codes commonly
foreign directors. In countries where independent members
recommend a high level of board
independence—more specifically, are not mandated by law, the labor market for independent
independence from management. directors does not develop, which, in turn, affects the
quality of independent board members.
6
See Zattoni and Cuomo (2010) for an overview of requirements related to board independence in corporate governance codes.
8 ISSUE 22
Private Sector Opinion
Review of Research on Board Independence
One possible interpretation of mixed results is that the nominally independent directors
are not independent enough or not really independent at all. The independent directors
may also be in such a minority on many boards that they are ineffective in the face of
nonindependent or affiliated directors. There is some empirical support for arguing
that a critical mass of independent directors would decrease the likelihood of their
marginalization.8
Scholars generally agree that the existence of a controlling shareholder in a firm has
fundamental influence on the meaning of independence and the board’s role.9 A variety
of possible links between the dominant shareholders and the independent directors may
not be captured by the letter of the corporate governance codes. Some researchers also
report that independent directors’ incompetence and their insufficient devotion of time
contribute to their ineffectiveness, citing the ceremonial role they play in many controlled
companies.10
A further complication arises in business groups, since important decisions are frequently
made outside the board at the apex of the group, and the board meetings of subsidiaries
remain a symbolic formality. More research is needed to clarify these issues.
Investor Perspective
Despite limited evidence of the impact of director independence in emerging markets, our
review of investment policies of major institutional investors shows that many of them
still expect boards to have a meaningful composition of independent directors to protect
their minority interests, especially in companies controlled by families, other firms, or
governments. Listed below are the risks of a nonindependent board, potential red flags,
and possible remedies or best practices regarding board independence.
7
See Hermalin and Weisbach (2003) and Bhagat and Black (2000) for reviews of literature on developed markets.
8
For example, see Konrad, Kramer, and Erkut (2008) for an empirical study on the effect of diversity, suggesting that minority opinions are
marginalized below a threshold of three.
9
See Bebchuk and Hamdani (2009) for an excellent explanation of this position.
10
See Li et al. ( 2011) for an explanation of the ineffectiveness of independent directors in the context of China.
ISSUE 22 9
Private Sector Opinion
Key Risks:
Recommended Measures:
10 ISSUE 22
Private Sector Opinion
• Remuneration. The company should develop a remuneration strategy—approved
by independent directors—that aligns executive management with minority
shareholders through a focus on long-term value creation.
• Best practices to enhance board effectiveness and independent oversight. These
can include:
• Identification of a specific director contact for investor outreach;
• Access to timely information flows, including financial statements and risk-
management reports;
• Private meetings of independent directors without the presence of executive
management and controlling shareholders;
• An independent board audit committee, whose members have relevant financial
experience;
• Disclosure of the risk-management process. There should be clarity on how
the board and executive management define and oversee management of risks,
including financial, operational, and reputational risks. Relevant structures,
policies, and processes should be featured in company public disclosures.
Many of the risks to shareholder value ultimately relate to concentrated ownership, which
is the predominant form of ownership in most emerging market companies.11 In many
cases, controlling shareholders can be a positive influence by providing strong oversight
over executive management and by fostering a corporate culture focusing on long-term
value creation.
Too often, however, controlling shareholders have the opportunity to engage in abusive
behavior, a circumstance that can be exacerbated in jurisdictions where transparency is
poor and where a weak rule of law fails to give minority investors proper judicial recourse.
For example, the case of Satyam Computer Services in India in 2009 demonstrates how
a controlling owner can perpetrate fraud and serve the owner’s interests at the expense of
minority shareholders. Similar examples exist in other markets. In 2008, Sibir Energy in
Russia agreed to engage in property transactions to accommodate one of the company’s
largest shareholders. In Gome Electrical Appliances in China, the company’s chairman
and controlling shareholder was convicted in 2010 of manipulating the company’s stock—
and has attempted to control the company from prison.
11
Bebchuk and Hamdani (2009).
ISSUE 22 11
Private Sector Opinion
Business group structures that bring together diversified businesses under the common
control of a controlling shareholder add further complexity to concentrated ownership. In
many countries, most firms are affiliated with a business group that is controlled by an
owner through a complex web of ownership structures.
Most of the empirical studies focus on understanding the role of business groups as an
internal market. Intragroup transactions involve transfer of labor, materials, goods, assets,
and financial capital. These related-party transactions may be subject to conflicts of interest
or may have hidden objectives, because businesses are frequently organized into groups that
include a diversified portfolio of firms controlled by the same controlling shareholder.12
A key risk in business group affiliations is the potential for expropriation or use of a
company to serve the interests of controlling shareholders rather than the company’s
own interests. The likelihood of expropriation increases when the controlling shareholder
is a minority owner but controls the majority of the votes by corporate pyramids and
cross shareholdings. Family-owned business groups (multiple firms controlled by a single
family) are likely to adopt a pyramidal ownership structure. Researchers present evidence
of a significant amount of tunnelling13 that takes place in such firms.14 Diversion of cash
flow is higher in firms placed in a pyramidal structure than in firms controlled directly
by families. The lower the direct ownership, the higher is the diversion. Transfers can
be accomplished via loans with no or low interest or even without any expectation of
repayment, via overpayment for services, or by selling a firm’s assets for a fraction of its
market price.
On the other hand, controlling owners may also act as a positive force and inject resources
into a controlled company. There is some evidence that, in state-controlled business
groups, the state can provide constructive support to firms in a way that benefits minority
shareholders by preventing managerial overinvestment.15 However, in other cases, state
influences in emerging market companies can reflect government agendas that suggest
limited commercial motivation or regard for the interests of minority shareholders. For
example, in Chinese state-owned enterprises, the rotation of chief executives from one
state-controlled firm to another (sometimes competing firms) raises questions about
commercial effectiveness and succession planning.
12
See, for example, Kar (2010).
13
Tunnelling is a transfer of assets and profits out of firms for the benefit of their controlling shareholders.
14
See Bertrand, Mehta, and Mullainathan (2002); Almeida and Wolfenzon (2006); and Morck, Wolfenzon, and Yeun (2005) for ample
evidence of the tunnelling propensity of controlling shareholders.
15
Yu, Van Ees, and Lensing (2009).
12 ISSUE 22
Private Sector Opinion
Corporate governance literature indicates a consensus that
business groups function primarily as tunnelling devices A key risk in business group affiliations is
for their controlling shareholders, yet strategy literature the potential for expropriation or use of
argues that business groups can substitute for weak market a company to serve the interests of the
controlling shareholders rather than the
institutions in emerging economies.16 Business groups can
company’s own interests.
effectively nurture and manage human capital through
resource sharing or internal labor markets to compensate for
a shortage of skilled labor, and they can leverage free cash to substitute for inefficient
public capital markets. There is also some evidence that group companies perform better
than stand-alone firms, based on productive capabilities, although in some countries the
results indicate the reverse.17
Investor Perspective
Many investors take an agnostic view of business group affiliations. They recognize that
the presence of controlling shareholders can serve a positive or negative function, and so
their influence should be assessed on a case-by-case basis. Listed below are the risks of
business group affiliations, potential red flags, and possible remedies or best practices.
Key Risks:
16
See Khanna and Yafeh (2007) for an explanation of the role of business groups in allocating scarce resources and capital in the absence of
effective labor and capital markets.
17
See Mahmood and Mitchell (2004) for a discussion on innovation and business group affiliation.
ISSUE 22 13
Private Sector Opinion
Recommended Measures:
18
Ultimate beneficial ownership refers to ultimate shareholders with voting rights whose ownership is disguised by institutional ownership.
14 ISSUE 22
Private Sector Opinion
Conclusion
More research is needed to better understand the many aspects of the relationship between
corporate governance and firm performance in emerging markets. Published research is
limited. But, because emerging market firms are generally affiliated with multiple networks
connected by formal or informal ties, the structures themselves present challenges for
quantification and scientific data analysis.
Recent corporate governance research has been interdisciplinary, including law and
finance research as well as investigation from organizational, management, and sociology
perspectives.19 These studies reflect the importance of looking at corporate governance
holistically to gain a better understanding of how drivers of “good” governance are
supported or undermined by the institutional framework.
The guidance and recommendations presented in this paper must be framed within the
overarching context of complexity. Firms need to engage in a more systematic outreach
to minority investors to demonstrate how their own approach to governance addresses
investor risks and concerns. Doing so could carry the benefit of reducing, or possibly
eliminating, discounts that are often made on emerging market firms, reflecting both
macro and micro governance concerns.
Also, institutional investors in emerging market firms should take greater responsibility
for building a sustained dialogue with the boards and executive management of the
firms they invest in. This means that investors should exhibit the patience necessary to
take a long-term view and to work with firms to help them improve their governance
standards—and ultimately their valuations, over time. This process of engagement has the
potential to add value to firms and to investors.
Finally, the dialogue between academia and the investment community should improve
further. This is where the Global Corporate Governance Forum has a role: supporting
research on corporate governance in emerging markets and facilitating a dialogue between
the scientific community and investors. The Forum is addressing this need through the
Emerging Markets Corporate Governance Research Network.
19
Aguilere et al. (2008).
ISSUE 22 15
Private Sector Opinion
Insights from the Emerging Markets Corporate
Governance Research Network
To promote corporate governance in emerging markets and transition economies, the
Forum supports the Emerging Markets Corporate Governance Research Network. The
network’s conference in Seoul, Korea, in May 2011, included the presentation of nearly 40
papers. Among the topics were “the impact of corporate governance on firm performance
and economic development” and “the role of legal, economic, and political institutions
in shaping corporate governance systems in emerging markets.” (All of the papers are
available at: http://www.gcgf.org/ifcext/cgf.nsf/Content/Korea_RN_May2011.)
Finally, we find that the majority of institutional investors that responded to our
survey are willing to engage in shareholder activism. Their preferred methods would
be, first, to vote with their feet (i.e., simply sell the shares), second, to vote against the
company at the annual meeting, and third, to engage in discussions with the firm’s
executives. Further, a substantial number of the investors would consider contacting
the firm’s directors to discuss their concerns and some would even employ the more
extreme measure of taking legal action. The strength of these responses combined
with the fact that only a small percentage of the investors would engage in public
criticism imply that behind-the-scenes shareholder activism may be more prevalent
than previously thought.
16 ISSUE 22
Private Sector Opinion
A director’s social network matters in determining a firm’s value—so, too, does his
or her “independence” or “friendliness.”
Villanova University Professor Jonathan P. Doh and lecturers Kenneth Amaeshi (University
of Edinburgh) and Onyeka K. Osuji (University of Exeter) express some skepticism
regarding the power of corporate social responsibility (CSR) to drive institutional change.
In their paper, “Corporate Social Responsibility as a Market Governance Mechanism: Any
implications for Corporate Governance in Emerging Economies?” they write that, “despite
the promises of CSR, it will be dangerous to rely on it, in isolation of other complementary
institutional configurations, to drive institutional change and enable a progressive society
in different institutional contexts.”
ISSUE 22 17
Private Sector Opinion
Firm performance could be improved by limiting family involvement.
Researchers Mark Lang and Mark Maffett (both at the University of North Carolina
at Chapel Hill) used a diverse global sample to demonstrate that “firms with greater
transparency, as measured by quality of accounting standards, quality of auditor, level of
earnings management, analyst following and analyst forecast accuracy, are characterized
by less volatility in liquidity, as well as lower correlations between firm level liquidity
and stock returns. Further, more transparent firms are less likely to experience ‘extreme
illiquidity events,’ where liquidity essentially vanishes. . . .” Their paper, “Transparency
and Liquidity Uncertainty in Crisis Periods” (October 2010), goes on to say that “the
effect of transparency on each of our liquidity variables is more pronounced during market
downturns.”
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Private Sector Opinion
Table 1: Summary of Empirical Studies of Board Independence in Emerging
Markets
Dependent Independent
Study Country Main Results
Variables Variable (mean)
Proportion of
Liang and Li Return on
China outside directors Positive significant
(1999) investment
(25%)
Proportion of
affiliated (30%) Positive significant
Peng (2004) China ROE, SGR and nonaffiliated (affiliated outside
outside directors directors on SGR)
(11%)
Cheung,
Connelly, Market-to-book Number of outside
Hong Kong Not significant
Limpaphayom, ratio, ROE directors
and Zhou (2007)
A higher proportion of
independent directors
Proportion of
moderates the
Jaggi and Tsui Abnormal insider independent
Hong Kong positive association
(2007) trading nonexecutive
between insider
directors (16.68%)
selling and earnings
management.
ISSUE 22 19
Private Sector Opinion
Dependent Independent
Study Country Main Results
Variables Variable (mean)
Proportion of
Hong Kong, Concave relationship
independent
Chen and Malaysia, with an optimal
ROA and Tobin’s q directors (23%
Nowland (2010) Singapore, level of board
family firms, 34%
and Taiwan independence at 36%
other firms)
ROA, ROE, the Proportion of
Ghosh (2006) India average value of nonexecutive Not significant
ROA, ROE and ROS directors (7%)
OLS: Not significant
RR: Positive
Indonesia,
Ramdani and Proportion of significant
Malaysia,
Witteloostuijn ROA outside directors
Korea, Rep.,
(2010) (69%) QR: Positive
and Thailand
significant at the
median and 75th
percentile
Proportion of
The level of
Barako (2007) Kenya nonexecutive Negative significant
voluntary disclosure
directors (>50%)
ROA, ROE, Profit Proportion of
Choi and Hasan
Korea, Rep. efficiency, Risk outside directors Not significant
(2005)
measures (50%)
Dummy variable
indicating whether
Black, Jang, and Tobin’s q and
Korea, Rep. firms have 50% Positive significant
Kim (2006) profitability
or more outside
directors
Proportion of
outside directors Not significant
(31.2%)
Choi, Park, and
Korea, Rep. Tobin’s q
Yoo (2007)
Proportion of
independent Positive significant
directors (21.3%)
Proportion of
Cho and Kim
Korea, Rep. ROA outside directors Positive significant
(2007)
(46.2%)
Proportion of
Kim (2007) Korea, Rep. Tobin’s q outside directors Not significant
(26%)
20 ISSUE 22
Private Sector Opinion
Dependent Independent
Study Country Main Results
Variables Variable (mean)
Board
independence
Cumulative market-
Black and Kim index based on the
Korea, Rep. adjusted returns Positive significant
(2007) existence of 50%
and Tobin’s q
or more outside
directors
Proportion of
Mak and Kusnadi Malaysia and
Tobin’s q independent Not significant
(2005) Singapore
directors (34%)
Not significant
Filatotchev, Dummy variable:
ROA, ROCE, EPS,
Lien, and Piesse Taiwan Independent board
STIC Negative significant
(2005) chairman (23%)
(STIC)
Negative significant
Proportion of (ROA)
Kaymak and ROA and asset
Turkey outside directors
Bektas (2008) growth
(69%) Not significant (asset
growth)
Fraction of
Ararat and
Turkey Tobin’s q, ROA independent Negative significant
Yurtoglu (2011)
directors (7%)
22 countries,
Dahya, Dimitrov, Proportion of
including 7
and McConnell Tobin’s q outside directors Positive significant
emerging
(2008) (69%)
markets
ISSUE 22 21
Private Sector Opinion
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About the Authors:
Melsa Ararat is Director of Corporate Governance Forum of Turkey and a
member of the Faculty of Management at Sabanci University, Turkey. She is
the founder of ILLAC Ltd, a London-based advisory services firm specializing
in governance and sustainability, and one of the founders of Logos Asset
Management, an independent firm in Turkey. Melsa’s research centers on
corporate governance and sustainability in emerging economies, and she
has published in refereed journals, contributed to numerous books, and is
the author of Sustainable Investment in Turkey 2010, a report published by
IFC. She is a member of ECGI (European Corporate Governance Institute)
and of ICGN (International Corporate Governance Network), where she
sits on the awards and business ethics committees. Melsa has coordinated
the Forum’s Emerging Markets Corporate Governance Research Network
since 2007 and has been director of Carbon Disclosure Project-Turkey since
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